How Soon Should a First Home Buyer Speak to Their Finance Specialist?
The lending process may feel a bit mindboggling, but things may go more smoothly if you chat to a finance specialist AKA mortgage broker early on.
Just remember, there are heaps of things to consider when buying your first home. Your deposit for starters, along with your borrowing capacity, the type of security, and even what type of loan you may want.
It's best to be prepared for the process before you’re ready to buy. That way you have a better chance of buying your dream home when it hits the market.
So, let’s look at some things you should think about when preparing to chat with your finance specialist.
How much money do you need for a deposit?
Here’s one very important, and often not widely known, the reason why you might want to start preparing to buy your first home sooner than later.
You know how you budget and work out your expenses, so all the bills are paid and you still have some fun money? Well, most lenders will also want proof you’re able to save money – usually in the form of 3-6 months of consistent savings.
This saving habit is to prove you have the funds to complete the mortgage transaction and you’re able to commit to paying your mortgage repayments once you settle your loan. The lenders basically want to make sure you’ll pay up regularly as opposed to blowing your savings on the latest LEGO release.
So, your deposit amount may vary, and some lenders might let you borrow up to 95% of the property’s value, which means you’ll only need to save up 5% of the property’s value. BUT, if you choose a loan with a low deposit you may be required to pay Lenders Mortgage Insurance (LMI).
What is Lenders Mortgage Insurance?
So, you know how you pay car insurance? Well, here's another life situation where you may need to invest in insurance.
As a borrower, you pay LMI at settlement of your loan – it’s basically to protect the bank in case you don’t cough up your mortgage repayments and they have to sell the property at a loss.
One thing you must be aware of with LMI is it does not protect you if you lose your job or get sick. If you want to avoid paying LMI, you usually need to be borrowing less than 80% of the property’s value.
What if you can’t save the full 5% deposit?
So, what happens if you don’t have the full 5% deposit saved? The good news is there are other options available to help you buy your first home.
Consider a family guarantee
You may have heard of a family guarantee but not be 100% sure what it means. It basically lets your family – usually your parents – use their property as extra security to guarantee a portion of your home loan.
A family guarantee may allow you to borrow a higher percentage of the property’s value – sometimes even up to 100% – without having to pay for LMI.
However, when thinking about a family guarantee, you must make sure everyone involved understands the risks as well as the benefits. While it may be great family members are willing to help you out, they need to be aware if the borrower – AKA you – defaults on your loan, they could find themselves in the crossfire.
For example, if you default and the lender sells your home and the sale doesn’t make enough money to cover the remainder of the loan, the lender will expect the guarantor to make up the shortfall to the value of what they’ve agreed to guarantee.
And, since we can’t predict the future and what might happen money-wise, most lenders require guarantors to receive their own legal and/or financial advice before agreeing to such commitments.
Demonstrate your ability to pay rent instead
We all know how hard it is to save up a full deposit, even when it’s 5%, while paying rent. Thankfully, some lenders recognise the struggle and may allow you to demonstrate your financial capacity in other ways.
For instance, you might be allowed to use your rental ledger from your real estate agent to show you regularly meet your rental payments. You may be allowed to use a cash gift – such as from family – to meet the remainder of the deposit.
Check out the latest grants and first home buying incentives
You know all those ads on the radio and TV from federal and state governments about how they’re ready to help first home buyers? It’s time to start paying attention to them.
Speak to your finance specialist AKA mortgage broker so they may assist you figure out which grants and incentives you could apply for.
If you need some advice on getting organised to buy your first home, get in touch with Pania to discuss your home loan options.